David Kotz, past Inspector General of the US Securities and Exchange Commission gives a first-hand account of his experience with some of the major financial crimes of our time at the time the nation was tumbling into a financial crisis. He tells of his encounter with Madoff and describes his cases. Now a corporate fraud investigations advisor at Gryphon Strategies in Washington, D.C., he shares his unique perspectives with ACFCS.
In late January 2012, I left the Securities and Exchange Commission after more than four years as Inspector General. When I assumed the job, I never thought the agency I was overseeing would be center stage as the nation took a devastating economic dive. Everyone wanted to know why the SEC and other US financial agencies had not predicted the crisis. As Inspector General, I was expected to provide answers, and fast.
With a staff of less than 25, we conducted nearly 200 audits and investigations that, I believe, left an imprint on the nation’s financial landscape. Many of our reports generated strong interest in Congress and with the investing public. They covered subjects from the SEC’s oversight of investment banks, like Bear Stearns, to naked short selling, to credit rating agencies and whistleblower programs.
We also probed the adequacy of counter-fraud efforts and the SEC’s failure to uncover the $50 billion Bernard Madoff fraud and the $7 billion alleged R. Allen Stanford scheme.
Call from SEC Chairman about SEC actions on Madoff
The nine months we spent investigating how the SEC failed to uncover Bernie Madoff’s $50 billion Ponzi scheme were the most intense of my tenure. Within a day or two after Madoff confessed, I got a call from former SEC Chairman Christopher Cox asking me to investigate comprehensively if the SEC could have uncovered the Ponzi scheme and, if so, why it failed to do so.
With a team of four investigators, we spent nine months conducting 122 interviews, reviewing thousands of pages of examination reports and 3.7 million e-mails. Our 457-page report of investigation had over 500 exhibits analyzing the entire historic saga of SEC action and inaction concerning Madoff.
To say it was a stressful time is an understatement. It was also invaluable for me and my team in developing expertise in complicated corporate investigations. We were faced with the fact that many of the agency’s principal players had left since the SEC examinations of Madoff had started in the 1990’s. We could no longer compel them to talk.
Utilizing different approaches, we were able to interview all the pertinent individuals, including former SEC employees, with knowledge of Madoff’s operations and interaction with the SEC. We also interviewed Eric Swanson, the former SEC official who had married Madoff’s niece, Shana, even though he was running the risk of criminal prosecution for his dealings with the fraudster.
Meeting ‘astonished’ Madoff aghast at SEC’s failure to probe
The most memorable interview was with Madoff himself, of course. At the time of our interview, which was held at the Manhattan Correctional Center, he was refusing to speak with US Department of Justice lawyers or investigators.
Our interview with Madoff took place on June 17, 2009 at 3:00 PM and lasted several hours. Accompanied by two lawyers, he complained of “misinformation” that was being circulated, but added, “I’m not saying I’m not guilty.” He revealed how easy it would have been for the SEC to uncover his Ponzi scheme and how “astonished” he was that the SEC never asked for records that would have quickly shown that he had not been trading.
Madoff described a nervous moment after one SEC interview. He said he “thought it was the end of the game for him, and Monday morning they’ll call [for the trading records] and this will be over….”
“I’m very proud of the role I played in the industry,” he said, adding, “Of course, I destroyed that now.” He showed no deep remorse for his victims, including those who lost their life savings.
Making the Madoff record, debunking conspiracy theories
If I have a special sense of pride about my experience with the Madoff case, it is that our report produced a consensus that we uncovered all that could be found. I believe our report is viewed as the definitive accounting of the Madoff saga, including the debunking of conspiracy theories about the SEC’s interactions and relationship with Madoff.
The Madoff investigation and report did not consume all my time, and the office of SEC Inspector General was never short of work. In March 2010, we completed a 150-page report documenting the failure of the SEC to uncover and stop the $7 billion alleged Ponzi scheme of R. Allen Stanford, who is now on trial in federal court in Texas. We conducted 51 interviews, reviewed 2.7 million emails from and to 40 SEC employees and read thousands of pages of documents.
Diverse work led to lifetime memories and expertise
My work as Inspector General went beyond big-league fraudsters. In May 2011, we reported that the SEC had conducted a deeply flawed analysis to justify the leasing of 900,000 square feet of space for its Washington, DC, facility. This gross overestimation of headquarters office needs, including a projected 300 percent expansion, had resulted in an unnecessary commitment to $557 million over 10 years.
In October 2011, we reported that the SEC had routinely and improperly destroyed records pertaining to pre-investigations that should have been preserved as federal records. These documents, we found, included anonymous correspondence and complaints, SEC document requests to companies during pre-investigation phases, and correspondence accompanying the production of records by companies responding to SEC requests.
My experience as SEC Inspector General enriches me with memories for a lifetime. It also equips me with unique knowledge, tools and approaches to complex corporate fraud investigations, pre-deal due diligence and litigation support that help the law firm, institutional and corporate clients of Gryphon Strategies, the very capable investigation firm at which I am Managing Director in Washington, D.C.
(David Kotz will be one of 24 expert speakers at the International Financial Crime Conference & Exhibition of the Association of Certified Financial Crime Specialists on September 12-14, 2012 in New York. Full program and other details available at the conference page or by calling Alexander Garcia at 786-517-2702)